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Hugh Pickens writes "NPR reports that not so long ago, the prospect of a debt-free U.S. was seen as a real possibility with the potential to upset the global financial system. As recently as 2000, the U.S. was running a budget surplus, taking in more than it was spending every year — and economists were projecting that the entire national debt could be paid off by 2012. So the government commissioned a secret report outlining the possible harmful consequences of retiring the debt completely. For one thing, paying off the national debt would mean the end of Treasury bonds, a pillar of the global economy. Treasury securities are crucially important to the world financial system in a number of ways: banks buy them as low-risk assets, the Fed uses them for executing monetary policy, and mortgage interest rates vary based on Treasury rates. 'It was a huge issue ... for not just the U.S. economy, but the global economy,' says Diane Lim Rogers, an economist in the Clinton administration. In the end, Jason Seligman, the economist who wrote most of the report titled 'Life After Debt (PDF),' concluded it was a good idea to pay down the debt — but not to pay it off entirely. 'There's such a thing as too much debt,' says Seligman. 'But also such a thing, perhaps, as too little.'"

If I run a company, and I perceive money to be cheap right now (i.e. low interest rates for me), the logical thing for me to do might be to borrow lots of money and invest it into projects that will have a long term payoff, and allow me to grow or solidify my company. Same thing for individuals: If you can get a cheap interest rate, borrow and invest in something (perhaps a cost-effective education) that will have a good payoff.

The factors that create "cheap money" are having a great credit rating and the market interest rates being low.

The US had a great credit rating during 2000-2010. And interest rates could be considered low. So a logical decision would be to borrow lots of money at cheap rates, and invest in projects with good payoffs. I don't believe that the historic debt was necessarily a bad decision.

The bad decision was to borrow a shitload of money and have a huge party of wasteful spending.

... logical thing for me to do might be to borrow lots of money and invest it into projects... The bad decision was to borrow a shitload of money and have a huge party of wasteful spending

Absolutely correct.

Businesses have the concept of capital expenditures (generally plant, property, and equipment) and operational expenditures (labor, utilities, rent). For a family, capital expenditures are buying a house; operational expenditures are going out to dinner. Borrowing for capital expenditures when interest rates are low is an intelligent maneuver. Borrowing to cover operational costs is unsustainable.

(Yes, I know, you can use your credit card to buy dinner [operational cost] and pay it off at the end of the month... you're not incurring long term debt. However, using the credit card for dinning out all the time and then only paying the monthly minimum, you're heading for trouble.)

This is called "a bubble." It's a situation of unsustainable growth and prosperity. It's like buying lots of things on credit and thinking you're well off. In reality, someone will come along to collect and then you will realize you were never well off.

the logical thing for me to do might be to borrow lots of money and invest it into projects that will have a long term payoff

...as long as you can identify projects that really will have a long term payoff. Housing fit the bill, until it didn't. But the snake oil salesmen (aided by the ratings agency) never noticed the shift. Without decent information, borrowing and investing can easily be traps. CEO's are expected to know how to get that info, but even they botch it more often than not (because 'long term' now means quarter to quarter to them, and because they are often rewarded whether they succeed or fail). Regular folks

and by the way, by 'never noticed the shift', I mean 'pretended not to notice the shift'. These folks aren't morons - once a bubble forms, as long as they can get away with it, they're paid not to 'notice' bubbles. That's why we need regulators that are independent of the systems they regulate.

Back around the peak of the housing bubble, I heard Alan Greenspan interviewed about his then new autobiography. The interviewer asked him whether a house was always a good investment, and he answered "In a capital

If there is no US debt, implying no need for Treasury bonds, that means there's nothing for people to invest in?

Man, I've heard some absurd statements before, but this one takes the cake!

Nothing as "safe" as securities backed by the U.S. government. There may come a day when the U.S. government cannot pay its debts, but likely long before that day comes, the dollars they would be paid off in would be worthless too...

Personally, I have more faith in the U.S. government than, say, Apple, or WalMart.

There can never come a day when the US government cannot pay it's debts, because no matter how bad things get they always have the Option of Last Resort: Print as much money as they need. The resulting inflation would be so severe it'd erode trust in the currency and initiate the hyperinflation death spiral and lead to the most serious global economic crisis of all time... which is why it hasn't even been considered as a serious option. But it's there. Should the situation ever become so desperate that economic suicide is the only way out.

In the absence of a government and it's police force, might makes right. I'd expect to see first survivalist camps sometimes fighting each other, then forming alliances for mutual defence each led by a warlord.

I don't necessarily disagree with your predicted results but you're wrong about the lack of viable alternatives to oil. We could fairly easily sustain the world's energy requirements using Fission, Beamed Orbital Solar and a combination of the various traditional 'green' solutions out there. The problem is that the people with the power to make that happen are all short sighted fools who can't see/accept the basic facts of where we're heading (or just think that the problems will "sort themselves out" becau

That's called default through hyperinflation. The end result would be that the US still defaulted on its debt (and will be treated as such!), plus it just destroyed any dollar-based asset out there including hundreds of millions of peoples' dollar-based debts and savings. You really should think about the consequences of hitting the hyperinflation "reset button" before you post such things. As I see it, there is no "last resort" in that strategy. It's just self-destructive wriggling on the hook.

If there is no US debt, implying no need for Treasury bonds, that means there's nothing as clearly stable as Treasury bonds for people to invest in?

There FTFY. Suddenly if you actually read it the article doesn't seem as stupid as if you completely misrepresent it.

We are clearly going to get a big bunch of amateur economists commenting on this one. Lots of people who understand nothing of economics (and thus would be perfectly qualified to teach economics in most universities, it often seems). Given that this is a tech site and not an economics maybe let's at least try to read the article and then the Wikipedia article about whatever we are posting about and at least attempt to flame those that don't. Nobody up for that?

If we look at this a bit further, the obvious alternative to US treasuries would have been AAA rated securities, such as the collateralized debt obligations [wikipedia.org] which more or less caused the current economic crisis. That makes this paper pretty foresighted.

You're missing something critical. If there's less debt, there's less credit created by the Federal Reserve, because the Fed buys bonds in the repo market by writing checks on itself, monies from which go to the US treasury and into the economy. That's how the money supply expansion begins (it's multiplied by the fractional reserve banking system). The Fed has the asset of the bond on its books, and the equity of the newly created cash. Only the Fed can do this, since it has a legal right to counterfeit

It is if you want any kind of economic growth. If you have no inflation and no interest then keeping your money under a mattress becomes as good as putting it in a bank - in both cases, it will be worth the same amount next year. With a small amount of inflation and a similar interest rate, you want to put the money in the bank so that it will remain worth the same amount in a year, rather than being worth less if you put it under your mattress. The bank will then loan it to businesses wishing to start or expand, enabling them to grow.

You do realize that the officials under the Clinton administration that were studying these things were conservative economists, right?

Given that a balanced portfolio will include bonds for protection during times where the stock market isn't doing well, where are those investment dollars supposed to go? You need investment in order to grow the economy, unless you take the alternate route of nationalizing all the industries and fund it directly via tax dollars. If you don't have adequate protection from the

I read an article by a Nobel-winning economist (different committee than the Peace Prize). He said that coming out of a deep recession is like coming out of a skid. Let's say you were going too fast on an icy road and driving with more confidence than the road surface warranted. You start to slide into a ditch. Do you slam on the brakes and turn away from the ditch?

Using the same analogy... you can do that, and it might be the right thing in a recession, but if you keep doing that over and over, you will gain speed and make it that much more difficult and fatal when the next skid happens.

The big mistake is when you "turn into the skid" when you're not skidding the way that was done during the Reagan Administration. There was absolutely no reason at all to have deficit spending under Reagan, but he had to have his "Star Wars" initiative, which STILL hasn't shot a sing

This makes a lot of assumptions. First, if we really had paid off all the debt and had a surplus, Congress would have found plenty of ways to spend the excess cash, in particular, infrastructure. Or they could have rebated back the difference to tax payers. More importantly, once the debt level got low, Congress has shown repeatedly that they are willing to increase spending on everything under the sun, good and stupid alike, so the actual chance of paying off the debt completely and running into problems with no treasury bonds being issued, is highly unlikely.

The govt. can still issue bonds even if they have no debt, to assist the global market, the question being what they do with the cash that is raised.

During the boom time for real-estate values in Florida, the local counties were awash in money... they had plenty of things to spend it on. There are no more county maintained unpaved roads in most central Florida counties now, lots of new administration buildings, and now that the tax money is on the decline, they're all crying about programs they are having to cut.

I thought the promise of Republican politics was smaller government and less taxes, but when they got handed the Presidency and later control

I mean even if you don't currently don't have any debt you may want to have some for a couple of years because you want to make a big purchase like a house or a car. Actually on top of that even if you're in the black temporary credit is still useful and even I have that right now, it's called a credit card.(IE even if your finances are in the black loads of people still use credit cards since it helps with transactions.)

They made a study. And they looked at their glass sphere and the remains in their coffee mug and came up that maybe, no debt is a problem. The result is _perhaps_ there is something like too little debt. But they do not need to worry. The surplus during the early 2000 was due to the New Economy bubble. Every one made some extra money by lending and borrowing until the whole mess blow up, the fed reduced the interest rates and the financial companies worked on the housing crisis, which triggered financial crisis of today, which triggered the state finance crisis. And all debt of all countries increased from the last dip after New Economy and the present crisis. And the same applies to crises from the past.

The Jews had a ruling once (if I remember correctly) after 49 years they divided all livestock among all families equally. As that was the representation of wealth, they collected all the money of the world and divided it equally among the people. Maybe we should do that. Or at least take all state debt of all countries and declare it gone. Ok the banks would most likely end to exist. But hey we could build new ones.

Just look how it panned out in Russia since the fall of communism, where a bunch of workers got equal shares in the companies they worked for.

The way it worked out, when workers got a paper saying that they each own a share of the factory (which was also mysteriously valuated at 1/10th to 1/50th of its real cost, so that paper ended up being real cheap in market terms), but then the factory management not paying them a dime in salary for months, so that in the end they would sell said paper for a decent meal for their family - or else die from starvation?

This kind of "economics" is the sort of epic stupidity that is bringing down the US economy.

Using the US government as your debt-collection agency so you can park your capital somewhere while you golf with Obama or whatever it is you do, is EXACTLY the kind of thing that results in the deindustrialization of the economy.

When TFA says: "banks buy them as low-risk assets" it is betraying the truth of the "economics" profession reflected in Modern Portfolio Theory [wikipedia.org]'s so-called "risk free asset [wikipedia.org]". The reality is that this "risk free asset" is the foundation of the centralization of wealth via what classical economists referred to as "economic rent": The portion of return on the economy which is, for all practical purposes, simply the result of there being an economy.

A rational political economy would distribute all economic rent evenly in a citizen's dividend thereby replacing all government transfer programs (with their attendant public sector rent seeking [wikipedia.org]) with market demand for what the people (as opposed to the wealthy or the politically influential with their lobbyists) need..

What would saving the Republic do exactly? The US has never embraced Georgism and it's descendants, whether it had a strong republic or a weak one... two forces have opposed wealth accumulation in the US as far as I can see, the growth made possible by the massive availability of natural resources outpacing wealth accumulation (unfortunately that stopped working in the 70s) and strong central government stepping in (Sherman, FDR, etc).

The states have always been locked in by the race to the bottom enforced

The over-interpretation of the Constitution's Interstate Commerce Clause (violating the 10th Amendment) might be thought of as an inevitable result of the reaction to Shay's Rebellion that was, itself, the impetus for creating a stronger central government than that provided by the Articles of Confederation. If so, it was clearly not a uniformly held opinion of the Founders that the States should be so limited in their powers.

So practically speaking, it is true that even if the States were able to salvag

If I were to print money in my basement, I would go to jail. Why then are banks allowed to do it? Banks get to create money out of thin air every time they get people to sign a loan. This is because they are allowed to loan out 9x more money than they take in from people making deposits. That is why banks LOVE it when you deposit money in your savings account because it gives them permission to loan out 9x more money. Not only can they collect interest on that money that they create out of thin air, but if you can't pay them back, they get to seize your assets!

The hand that giveth is above the hand that receiveth. Private banks are above the governments who borrow money from them. Bankers are the masters of deception and fraud. The only things they create are debt and inflation through fractional reserve lending (fraud). Both of those are bad. They create all kinds of problems (such as the "business cycle"), and force people to participate in speculative investing or else watch their savings get inflated away.

Fractional reserve lending was pioneered by Nathan Rothschild and stemmed from greed -- he wanted to lend out more gold than he actually had! Anytime a bank expands the money supply by loaning out more money than they actually have, they are stealing from you who have saved. I understand the need to expand the money supply in order to prevent deflation. However, the government, not a private central bank, should be the one to do that. If the government created money, then they could spend that money rather than having to tax it away from the citizens.

It is no coincidence that the IRS was created shortly after the Federal Reserve Bank was created. How else would the government get money to pay interest on the money it borrowed? If you are in debt, you are a slave to your creditors. In 1913, "our" government allowed itself to become enslaved by the private Fed. The power to issue currency should reside with a government who is accountable to the public. The government exists to serve We The People. We The People should never allow ourselves to becomes slaves to our government (via entitlements, welfare, government healthcare, etc) who is a slave to the central bankers. Woodrow Wilson, and the few members of Congress who were actually present in the capital building 2 days before Christmas in 1913, made the terrible decision to give the power to issue currency to a privately held central bank (that doesn't even need to pay taxes!). The Fed is not really accountable to the public. Yes, the Fed board members are appointed by the President, but that very important decision should not be left up to a single man who may be too easily corrupted.

Governments do not need to borrow money from a bank. They can create money debt free! They are supposed to be doing that according to the US constitution:

"Congress shall have the power to coin money and regulate the value thereof." Since the value of money is determined by the quantity, Congress should be controlling the quantity of money, not banks!

Read up on Bill Still's ideas for monetary reform in his book "No More National Debt". If you don't want to read, then watch these films:
The American Dream
Money as Debt
The Money Masters
The Secret of Oz
Inside Job

If I were to print money in my basement, I would go to jail. Why then are banks allowed to do it? Banks get to create money out of thin air every time they get people to sign a loan. This is because they are allowed to loan out 9x more money than they take in from people making deposits.

That would be a problem - if the money in question weren't a) backed by collateral, and b) replaced as the loan is paid off. The amount of money circulating is thus a constant. (Even though it doesn't seem so to people wh

The ideal currency is one whose purchasing power remains constant over time. That could easily be done using a feedback control loop, such as a PID controller. Whenever there is inflation, the government could

Bank A loans out 0.9*deposit_X, which then gets deposited into Bank B. Bank B then loans out 0.9*0.9*deposit_X. Rinse and repeat say 100 times.

Ok. Bank A loans out 0.9*deposit_X, which then gets deposited into bank B. Bank A has 0.1*deposit_X. Bank B loans out 0.9^2*deposit, which then gets deposited into bank C. Bank B has 0.09*deposit_X. Bank C loans out 0.9^3*deposit...

Mod parent down for perpetuating the myth of the money multiplier. "When banks create money by extending credit (loans create deposits), this occurs completely within the banking system and results in a liability for the bank (the deposit) and a corresponding asset (the loan). The customer has an asset (the deposit) and a corresponding liability (the loan). This nets to zero." Get it? You completely forgot that any money banks loan out are deposited at other banks. Deposits are a liability for the bank,

Any single bank can only lend out 90%, but the amount of money supply expansion ends up being roughly 900% after many deposit/lend cycles occur.
As I was saying, the value of money is determined by the quantity. According to the Constitution, the value (and hence quantity) should be determined by Congress, who is supposed to be accountable to the public, but in reality is mostly bought off by corporations through lobbyists.

You said "This is because they are allowed to loan out 9x more money than they take in from people making deposits." They don't get to loan out 9x. All they get is the 0.9x and the hope that some of it will come back. The money supply is not what the bank "gets", it is just a picture of what happens.

You keep talking nonsense. Banks are not really limited in lending out by reserve ratios! This is because during the day they lend out AS MUCH AS POSSIBLE, and then if their reserve accounts at the Fed are insufficient, they borrow on the overnight market you hear mentioned frequently in such discussions. Banks are only constrained by their captial/asset ratio.

Let's look at one figure, the percentage change in the national debt. Take the two terms (Regan, Bush) before Clinton, and the two terms after him (Bush). Negative numbers are decreases, positive increases.

Regan +9.3%

George H. W. Bush +13.0%

Clinton -0.07%

Clinton -9.0%

George H. Bush +7.1%

George H. Bush +20.7%

The last time a Republican president decreased the National debt was Richard Nixon in his first term in 1973, +3.0%. This was over 9 presidential terms ago, over 36 years.

So when Republicans try and trash Clinton's economic record, they always quote misleading figures. Also known as lying.

How do you explain the fact that the largest increase came under George W Bush when much of the time there was an all-Republican administration?

Also this analysis plays dumb regarding the issue of the President having a big influence in what is in the budget bill. The tax cut and defense spending that caused the deficits under Reagan were proposals by Reagan that were passed by congress.

In addition the numbers here are rather biased - they are percentages of the current debt which reduce the impact of the e

Considering how Bush intentionally left out of the budget the cost of the both wars, as well as some other "home defense" spending, you have to check on the actual amount added to the national debt to see how much Bush really spent, which is MUCH higher than his "projected" budget deficit. I know, it's a great conservative talking point that Obama spent so much more than Bush, but anyone that tells you that is either outright lying to you, or is too ignorant/stupid to fact check the bullshit coming out of

Seriously, this idea that all debt is automatically evil is silly. There's absolutely nothing intrinsically wrong with it. It's a tool. We have tools like live CDs, antivirus, screwdrivers and such; the economy has tools like loans, bonds and such.

Where you run into trouble is if you can't service the debt. So really you want to avoid getting into so much debt that this is likely to be a problem. How much is too much? Depends how much you can service.

There is a problem with using public debt as a way to provide wealthy investors with a safe place to put their money. Debt is an investment because it is repaid at interest; public debt is repaid using tax dollars. Using tax revenue as a way to create returns on investments for the wealthy amounts to the enslavement of the population.

Public debt is a tool for weathering hard economic times and paying one-time costs. When it becomes a shelter for the world's richest investors, there is a problem.

Public debt ensures that all tax paying citizens are on the hook. Even someone who is responsible and is able to manage their personal money suddenly become beholden to whoever holds the debt. What better way to hijack an entire country?

In the 1950's each $1 borrowed produced approx 95 cents of GDP. By 2008 that had dropped to 12 cents. At the moment it's -45 cents. For every $1 borrowed the USA errodes 45 cents of it's wealth.
If USA fed spending continues at it's current pace? It will take 20% of the rest of the worlds GDP to fund that spending by 2020.
Europe is toast. They're about to go to the Chinese for funding. That will come will strings I'm not sure the West is ready for.
There will be no money left for the USA to use by 2020. The rest of the west will have used it.
Meanwhile the USA's industrial productivity is dropping year by year. Those "organise anywhere" people are getting what they want. A dismantling of capitalism. I'm not sure they're gonna like like it.
Industrial productivity is the only way out. But that's not going to happen while you have the Fed funding and subsidising projects that will lift energy and industrial input costs.
HHHmmm, I wonder what sort of reaction an economic dictator will get when they tell the USA how to run their country in return for continued support?
I, for one, am not looking forward to all this unravelling.

In the 1950's money was borrowed to fund research and development. This resulted in putting men on the moon and spurred the computer age and caused 20 years of growth. That is called an investment. Investment debt is a good thing. Consumer debt is a bad thing. Buying TVs on credit cards is a bad thing. That is the equivalent of what they politicians are doing with our money right now. They are wasting over $2 trillion dollars on the equivalent of paying people to stay home and watch TV and have kids that will grow up to stay home and watch TV and have kids. As much as people complain about the military budget it pales in comparison to the amount that is spent on social programs. What the politicians are doing now is the equivalent of borrowing money from one credit card to pay off another.

This resulted in putting men on the moon and spurred the computer age and caused 20 years of growth.

Give credit where it is due, and don't forget the spoils of war -- the German rocket technology and science, which propelled the US space science into the late 70s. The rest of the world was paying their war time debts up until the 80s.

We're not complaining about the military budget, we're complaining about the military spending. War spending is not in the budget. Trillions have been spent on the war, but were not in the budget. Military war spending is about on par with Social Security, then you have budgeted spending, and it then costs more than SS.

My economics teacher made it fairly simple to understand. Paraphrase: The amount estimated by our own government for unbudgeted military spending for the first 5 years of the war would have b

Or are you trying to argue that anything that benefits people (social security, healthcare...) contributes to "paying people to stay home and watch TV"?

In his own post, he refers to social programs as things which "[pay] people to stay home and watch TV." By his own definition, and my interpretation of its meaning, he is completely wrong. He made a very ambiguous (not to mention loaded) statement and I called him out on it.

I'm not attempting to impregnate my own opinion here (or maybe I am, but not on purpose), but you can't defend his statement by saying things like education are covered under his

What if a credit card was used to buy antibiotics which kept a kid from dying horribly, and that kid grew up to contribute to developing an important invention? Is that investment debt or consumer debt? What if instead of antibiotics the item bought was a book that inspired that kid to enter a productive line of work? How about then. What if instead of a book, it was a TV, and the inspiration came from Sesame Street or whatnot? What then?

Meanwhile the USA's industrial productivity is dropping year by year. Those "organise anywhere" people are getting what they want. A dismantling of capitalism. I'm not sure they're gonna like like it.

Industrial productivity is the only way out. But that's not going to happen while you have the Fed funding and subsidising projects that will lift energy and industrial input costs.

Absolutely wrong.

Industrial productivity is not going to increase domestically as long as it is significantly cheaper to manufacture products overseas (i.e. - in China, India, Indonesia, etc.). Meanwhile, domestic income tax revenue will continue to decline as former line-level manufacturing employees permanently lose their middle-class incomes, while the self-styled "job creators" buy Congressional complicity in sheltering their own spiraling incomes from taxation (see: General Electric, etc.), and in generating 10-figure tax-funded handouts to themselves (see: the oil industry). Saying the problem is, "the Fed funding and subsidising projects that will lift energy and industrial input costs," is an attack on the flimsiest of straw men. The true problem is the combination of relentless globalization, predatory trade policy by the new industrial giants (China, again, and India, again), and MBA-dominated domestic corporate managment's obsessive focus on short-term profitability at the expense of the long-term viability of the companies whose interests they pretend to serve.

Based on historical facts, your implication that it was all the Republicans would be false [wikipedia.org]. That graph shows that it was both the Democrats and the Republicans, and that the greatest year over year increases occurred while the Democrats were in control.

Interesting term, "rent". Try seeing what happens when you don't pay rent on an apartment.

If the U.S. fails to make payments on its debt, then those debts will be in default. The value of treasury bond holdings would collapse in a mass selloff. This would affect every financial institution in the United States, including those fuzzy little Credit Unions. Many, many institutions would require FDIC/NCUA intervention, and the funds aren't really large enough to deal with a problem on that scale. The U.S. would have to either print money (thus devaluing the dollar on the world market, leading to shortages), or let the banks and credit unions fail, leading to many people losing their savings.

So, instead the government *must* make its debt payments. We've got long-term unemployment right now. That means there are a lot of people who aren't paying taxes, and probably won't be in the near future. In fact, even when they do find a job they're likely to be less productive than they were for many years. Unemployment and underemployment also strains the social safety net, the government must pay more to maintain a basic standard of living and keep crime in check. Taxes can't be raised quickly without impacting production, and in fact cutting taxes is basically the government's only tool to increase production. At the same time, if the government can't balance the budget interest rates on U.S. debt will slowly increase. We typically will borrow for 1-5 years, and when the bond comes due we'll pay some portion of the bond with cash and take out another bond on the rest, sort of like having multiple 5-year mortgages. This means that an increase in interest rates actually affects the existing debt, not just new debt, so interest payments would increase quickly. Eventually, we won't be able to afford market rates and we'll have to find a lender willing to let us borrow at a more reasonable rate. In exchange for the loan they'll demand we make certain changes (similar to a bankruptcy court ordering your possessions be sold). These changes will be painful, but not as painful as those required to immediately balance the budget and pay off bonds as they come due. That's what's happening in Greece right now.

I'm curious, how will cutting taxes will increase production? Corporations are sitting on over $2 trillion in cash and the wealthy are desperately searching for ways to invest their money. Giving them more money won't help if there isn't the demand to make investments worthwhile. Around 70% of the US economy is consumer spending and nearly half of consumers already don't pay any Federal income tax. I'm mostly a capitalist at heart but when the wealth disparity gets skewed to the point it has in the US l

Tell that to the Greeks. Frankly, I doubt that the United States is in a position to win a potential war with its foreign creditors, considering how much of our manufacturing infrastructure has been sent abroad.

Remember how Nazi Germany solved their economic problems in 1930s? Social situation in the US is not yet bad enough to hijack the so-far-peaceful protests and spin enough hatred against some fictional threat with propaganda to start a war. But people are slowly getting desperate and they'll listen to anyone with a quick & easy solution pretty soon.

Social situation in the US is not yet bad enough to hijack the so-far-peaceful protests and spin enough hatred against some fictional threat with propaganda to start a war.

I thought that already happened in late 2001?

The whole "airplane/missile/drone-and-two-tall-buildings-Reichstag-fire" thing followed by war against people of different religion, culminating in mall cops grabbing my junk because I want to get on a commercial airliner... ?

Where do you think the government gets the money to repay its debts? There are two possibilities: tax revenue

The federal government never ever pay debts from tax revenue. Taxing is nothing more than a mechanism to reduce the aggregate money supply in the private sector. Once money has been taxed it is gone into the void. (for the federal government or any other currency owner that is)

The federal government doesn't own money. It doesn't make any sense, as it is the issuer and recaller.

As such, the only way for the federal government to repay debt is by creating new money. And with that realization, you quickly come to the understanding that the government doesn't have to borrow money if it doesn't want to. However, borrowing is a simple and easy way to manage interest rates and tie up private/foreign sector savings over a longer term so that it is impossible to flood the market with currency in a short interval. Hence, sovereign currency owners borrow to make the currency more stable.

If the bonds have too high of a rate, people will just put their money there and take the sweet payoff. A definite subsidy. If they are too low, people will put their money elsewhere, looking for a better return. The problem is, that turns into bubbles. There is a case to be made that the housing and finance bubbles were caused by too much money chasing after too few returns. If you can only get 2% from the Fed, then you are going to be sc

Yes, that is the Federal Reserve's notion of money and the one they prefer because they control that money. That's why keeping the US Dollar as the unit of international exchange is so important. Prior to this, the notion of wealth was collecting and maintaining what ultimately traces back to physical resources.

So now, "money" is generated by having someone "owe" you something. This is in a very literal sense a means by which the entire world is enslaved.... to the 0.0001%. I know it sounds all conspiracy theorist-like, but think on it.

The stuff you earn and save is actually a form of debt and its ultimate value is determined by the central party who owns the debt. If the Federal Reserve were to blink out of existence, ALL of my money becomes worthless and my savings becomes zero.

After the debasement which occurred in the 10th century, the solidus was discontinued, and replaced with the hyperpyron http://en.wikipedia.org/wiki/Byzantine_coinage [wikipedia.org]. These coins were discontinued as the empire declined, due to the military adventurism that spread their empire, but destroyed their capital base, leading directly to the breakup of the empire into successor states, which

Most people think the way a bank works is they take money from depositors and lend it out and make money on the difference. Even if that were true it would be creating money because if the person saves money in a demand account (savings or checking) where they have access to it any time they want and the bank lends it out they have created money. Say I put $1000 in savings. My account shows I have $1000. Say the bank lends out $900 of it (Assuming there is a 10% reserve requirement which isn't even true anymore). There is now $1900 in the economy. It gets worse because when that person pays someone that $900 it goes into their bank and that bank can create $810. Now there is $2710 in the economy. This keeps going until there is $10,000. So the banks create $9,000 of money from that first $1000.

The key to this whole thing is letting banks lend out demand money. If we made this illegal the whole situation would change. Banks would only be allowed to lend out time deposits which are things like CD's where you give up access to the money for a certain time. This would prevent the bank from creating money because they could only lend out money that you don't have access to.

This could be accomplished without causing massive deflation by slowly raising reserve requirements.

The main reason deflation is bad is because today people have adjusted their lives based on debt and inflation. With deflation your wage goes down and you have problems paying off debts. But once transitioned to system where debt isn't money people do much better. You don't have to put your money at risk because you can just save it in a vault and it won't lose value. This I believe is why we have the current system. The powerful bankers and politicians like inflation because it allows them to spend money they don't have to tax to get. Also inflation forces you into the financial system so that your savings have a hope of maintaining purchasing power.

To think about deflation you have to look at the technology industry. This industry is growing so fast in productivity that it is still deflationary. Do people ever rush out to by a TV because they think it will be more expensive next year? Some people like the latest and greatest but most people wait for products to drop until they are in their price range. This is deflation. I bought an Apple II GS in 1998 with monitor and printer for somethings like $1500. This is like $3000 today. My kids have toys that are about $20 that are as powerful as it. I just bought a printer, copier, scanner, fax for $40. This is massive price deflation and it benefits the consumer.

This requires a bit of clarification. In your first bit you describe the bank money multiplier. But you forget that in each step, someone is trading a good/service to get the money from someone who already has the money, via the bank. Surely this means more people are working and more goods/services are supplied? If the bank couldn't multiply money, only the guy who made the original 1K would have a job.

I agree we need sensible bank reserve requirements, but not to reduce the multiplier. We need them so tha

> You don't have to put your money at risk because you can just save it in a vault and it won't lose value.

That's *precisely* why small amounts of inflation are a good thing -- it forces wealthy individuals to put their money to work and actively invest it in productive endeavors to avoid having it slowly lose value over time. As fashionable as it might be to cry over poor, frugal individuals whose meager thousand dollar savings are now worth $900, the truth is that 99.9% of Americans have no real savings to speak of. If you have $10,000 "saved" and owe $300,000 on your mortgage & student loans with 20-30+ year payback horizons, your $10,000 aren't "savings" -- they're "short-term cash flow insurance" to keep your credit rating from getting destroyed if you end up unemployed for 6 months.

The truth is, the middle 70% of Americans (those falling between the lowest ~29% and top 1%) would overwhelmingly benefit from inflation, because the majority of their "savings" are negative in the form of long-term debt with fixed interest rates. A few years of relatively HIGH inflation would have the net effect of washing away most of that long-term debt into irrelevance relative to their new, higher & inflated annual salaries. A thousand dollars per month in debt payments are painful when you make $50,000/year. The same thousand dollars in debt payments are almost a nuisance if your income increases to $250,000/year.

My parents aren't wealthy, but I saw the benefit of inflation first hand 10 years ago. They moved to Florida in the late 70s, and bought a house for around $80,000. Compared to the $40,000 their old house in Ohio was worth, the amount was absolutely staggering, and they felt like they could barely afford it since they were only making slightly more in Florida than they earned in Ohio. Fast forward 15 years, when they were making 4 times as much per year (of which maybe 20-30% of the increase was due to career progression, and 70-80% due to 1980s inflation). They ended up paying off the house 5 or 6 years early, because at that point the mortgage payments were less than the electric bill.

Now fast forward to 2011. Their neighbors have $480,000 mortgages on the same houses that sold for $80k circa 1978 and were approaching sales prices of almost a million dollars in 2006, and are now averaging $360,000 today. Even if they can afford the payments, they'll never be able to sell them in a normal real estate transaction for the rest of their working lives, because it'll be at least 15-20 years before they've paid off enough debt to not be underwater on the mortgage and able to sell them normally. Among other things, this means they're effectively chained to their current job market, because relocating would mean having to simultaneously rent in the new location AND try to be an absentee landlord (which, in the current market, is almost always a losing proposition). Their neighbors are hardly unique -- it's the same situation just about everywhere else in America. The fact is, at this point nothing short of 5-10 years of fairly HIGH inflation is going to restore the traditional mobility of America's job markets. When you own a house that you can basically afford, but can't sell, the economics of relocating for a better job get blown to hell unless that new job comes with guarantees that don't exist anymore (like a hiring bonus big enough to cover the losses of having to move back if the company eliminates your position within 5 years).

(In case anybody's wondering, I'm not analogizing myself... my own house is worth slightly more than I owe, though it's mostly due to the home improvements I've made whose costs aren't factored into the mortgage itself).

Deflation is particularly deadly for things where there's a long supply chain or delay between investment and sale of finished merchandise, like auto manufacturing (parts are ordered months, sometimes years, before production begins... GM doesn't just go to amazon.com and order ten million of some part specific to one of next yea

You can stop reading, but it doesn't change the fact that we HAVE an economy because people are forced to invest instead of passively sit on money in a vault. Take away inflation, and you're left with de-facto feudalism where wealth is more or less eternal and static.

> If someone works hard and saves up to buy something large, like a house, your policy effectively steals a portion of that savings from them.

You'll have to pick a better example, at least with specific regard to "house you buy as your personal residence". Within comparable markets (obviously, someone selling a house in Detroit with the expectation of buying a comparable replacement in Los Angeles is in for a bit of a disappointment), you can sell your house and buy a comparable one with elsewhere. Now, you might not come out as well if you bought a house purely as investment property, but realistically, for about 98% of Americans (slightly distorted by flipping 5 years ago), "buying a house" is synonymous with "buying a house to live in as your one and only residence."

The fact is, if you're even remotely close to a typical middle-class American, your savings are a complete fiction anyway. They're a temporary insurance policy against a cash-flow disruption so you can keep making minimum payments and avoid losing *everything* in the meantime. Remember, in the context of inflation, 'savings' is almost entirely a synonym for "cash under the mattress", and NOT "investments", because investments (including invested retirement funds) generally inflate along with everything else.

So, if we're going to get personal, yes, fuck anybody who thinks it's worth destroying the economy so they can store cash in a mattress and expect it to magically retain (or gain) value. They're such a wacky, obscure, extremely rare edge case in the grand scheme of things, they aren't even a blip within the margin of error.

If the currency does not save your wealth, then it can't facilitate transactions, as it forces the person trading the good for the "money" to play "hot potato". Ever increasing monetary velocity decreases the value of that money until it becomes worthless.

Paying off the debt takes that money out of circulation again. As a consequence the money that's left over will become more valuable, and prices will drop. This could result in a deflationary spiral according to many economists.

Those economists are idiots. The only reason that's at all a risk is because the Federal Reserve has allowed the wealth to accumulate in the hands of a small group of people. Basically, robbing the poor to pay the rich by keeping treasury yields low. And they keep the yields low by issuing additional bonds.

The problem is that it has the effect of discouraging the poor from saving any money and gaining the advantage of savings while artificially increasing the numbers in the bank accounts of the rich.

So, in a sense it could cause a deflationary spiral, but only if there's criminal negligence on the part of the Fed as it would require a prolonged period of significant debt retirement rather than a smoother more predictable payment plan.

More bonds (from the *Treasury*) means larger supply of bonds relative to demand which means lower bond prices and higher yields. The Fed keeps prices up and yields down by *creating new money from nothing*, buying the bonds from the Primary Dealers. Thereby increasing the money supply, increasing inflation, reducing interest rates, pushing up asset prices, funding the Federal deficit and keeping the Too Big To Fail banks in business.

If you pay off debt the money is gone. Cash, paper foldable money, makes up about 5% of the money supply. The rest is just numbers in a balance sheet. Banks create new money when they create loans, but they don't create the paper -- just a ledger entry. The problem is, the money the banks create must be paid back at interest but they don't also create the interest. As a result, the amount of money owed is always greater than the amount of money in existence, thus ensuring that someone somewhere won't be able to find the money to pay off debts.

It's so odd that the banks can make a profit on something they don't even have -- the money they loan is loaned into existence and then they get real money back as profit.

I've watched the video before, and it doesn't get the details right. Besides, it doesn't give you any references, so it's worthless as an argument.

The effect in the end is similar: money is created. The only difference is that the video makes you think the banks don't have any risk, and take all the profits, which simply isn't true. Banks suffer the consequences just as badly.

Read the wiki page on fractional reserve banking, and how it increases money in circulation. Paying off debt is the same process in reverse.

A simple example: when I loan you $1000, and you give me an IOU in return, that IOU can be traded around, so it counts as money. In the mean time, that $1000 can also be traded. So, in effect there's a total of $2000 around from a single $1000 loan.

That analogy itself is messed up. You made an assumption that money was based purely on work. But if you want to follow the history of money that way, you have to realize that at one point money was traded for commodity.

Let's imagine that money is a measurement of favor. I lug you some rocks, then I will be entitled to some kind of favor from you tomorrow. Maybe you'd give me a feast with a whole chicken. But I wasn't in the mood for a chicken that time, so I decided to put off receiving favor from you. After two years, I expect to still be entitled to that feast of whole chicken. But with inflation, for some reason you'd only give me half of the chicken, because you claim that my favor has devalued over time. What gives?

You have to go back 50 years to before money was hijacked by our current system of theft.

Money was a store of value that was commonly used in exchange. That's it. Most of the world used precious metals for various reasons. Copper, Silver, Gold, ect. The reason is because it was valued by people and was a compact store of value. It came into existence by mining and coining.

You have to look at how much money is in existence vs all other goods. If

this becomes not an issue of the US economy, but of the ability to extend into others business. The economy would be fine, as there would be no need to raise money through bonds. The money would just be there. However, if we lost the reserve currency status, then the state department would be neutered.

The claims that we had erased the federal debt and had gone on to a surplus were based on long-range projections that were totally inaccurate, and had never been realized.

Possibly because the long-range projections didn't include 2+ unbudgeted wars, a near doubling of the regular defense budget, a huge expansion of medicare without any new revenues specified to fund it, big "temporary" tax cuts for billionaires, a huge loss of tax revenues due to the economic meltdown, etc.

It doesn't take a genius economist to figure out why the US debt is going up-up-up. You've just got to learn to ignore what politicians say and watch what they do.

Look, I never liked Clinton, but it's surely not his fault when the "fiscally conservative" Republicans who came after him act "fiscally conservative" and balloon both the debt and deficit with their warmaking. Of course the potential long-term result of the Clinton administration's policies wouldn't actually come to fruition after the Republicans got involved and screw everything up. It's not Clinton's fault that the Republicans did this.

Bush was a fiscal conservative?!? Since when? Even outside the wars the stupid b*st*rd kept spending. Remember the trillion dollar pill bill?

And frankly, let's not forget that it isn't just the president who decides the budget. Clinton delivered a budget that was $210B in the red. It was Newt and congress that balanced it (and generated the surplus).

Well actually Clinton did sign that budget eventually. And the next year it went much smoother. The one thing about Slick was that he was a smart politician. Once he saw the advantages to balancing the budget he quickly moved so that it became "His idea." Just like when he tried Health Care Reform. Unlike President Obama, once Clinton saw what a crazy powder keg that was going to be and how no one would be happy when it was over he quickly dropped that like a hot potato.

Prior to Republicans assuming control of Congress in 1995, President Clinton refused to embrace the idea of a balanced budget. Clinton's first budget called for an astronomical tax hike of $220 billion that Democrats in Congress increased to $240 billion. Clinton's first three budgets -- released in 1993, 1994, and 1995 (for FYs 1994, 1995, and 1996 respectively), left deficits of $241.4 billion, $201.2 billion, and $194 billion by his own estimation (which CBO scored at $228.5 billion, $206.2 billion, and $276 billion respectively). In the meantime he vetoed the Republicans' budget in 1995 -- a budget that would have cut taxes and been the first to have balanced since 1969. Not until election year 1996 did he even aspire to balance, producing a budget that left an $81 billion deficit in its final year.

And 1993 -- the year of the giant Clinton tax hike -- was not the turning point in the deficit wars, either. In fact, in 1995, two years after that tax hike, the budget baseline submitted by the president's own Office of Management and Budget and the nonpartisan Congressional Budget Office predicted $200 billion deficits for as far as the eye could see. The figure shows the Clinton deficit baseline. What changed this bleak outlook?

Newt Gingrich and company -- for all their faults -- have received virtually no credit for balancing the budget. Yet today's surplus is, in part, a byproduct of the GOP's single-minded crusade to end 30 years of red ink. Arguably, Gingrich's finest hour as Speaker came in March 1995 when he rallied the entire Republican House caucus behind the idea of eliminating the deficit within seven years.